This week, Digital Dirt is picking up on the common thread in recent deal discussions--the impact of JVs as some begin to unwind. Today's most dramatic example of course, lies at the heart of the TOUSA bankruptcy case. After non-performance last year and assurance the deal would not become recourse to the company, TOUSA's JV with Transeastern Homes ending up merging back into the company's books last July, destroying its capital structure and ultimately forcing the company into a Chapter 11 filing in January.
So, who to speak better about the viability of these deals than someone with fresh burns. In an exclusive interview with Big Builder last week, TOUSA CEO Tony Mon said of JVs: "They have been around forever, and they are a valid mechanism of sharing risk and know how...they will survive, maybe just with different partners. In this industry there is a natural attraction between people who have capital and people that have the know how."
Clearly, there is no disputing that, but it's likely of little comfort to the players in the midst of current chaos. Though it's not clear what the implications are going to be for partners in these deals, there is fear.
To that end, I am asking reader to Email me at firstname.lastname@example.org with any details on JV activity and its implications in local markets. Any dirt on land transactions, municipal implications, etc is always welcome.
Meantime, here's a rundown of the latest dirt on dirt:
Las Vegas The JV that is attracting the most attention currently is a 2,000-acre project called Inspirada in the Valley. Earlier this week, Toll Brothers made headlines in The Wall Street Journal after filing in its quarterly financial statement with the Securities and Exhange Commission documentation a disclaimed at the very end of the document that warned of "significant losses" if JV partners do not honor obligations during the slowdown in the housing market. Toll did not specify any companies by name, but one of the JV partners is Kimball Hill Homes, which is currently restructuring itself and has stated it is contemplating a bankruptcy filing. Other partners include KB Home, which, like Toll, began selling-in the project's first phase in early 2007, Meritage, which has closed down its sales operations there to revamp its product offerings after it was clear there was no demand for them, Beazer, Pardee, and Woodside Homes. Another partner is Las Vegas-based master developer Focus Property Group, which reportedly stopped paying interest on its outstanding loans last month and announced that it had retained the financial advisory services of The Blackstone Group. Focus CEO John Ritter says the company is making an effort to restructure its debt and to obtain new capital for liquidity and operations during the downturn. And the company issued a statement to Big Builder that said, "With regard to Inspirada, Focus has fully performed and has paid off its portion of the JP Morgan loan facility. In addition, Focus has posted a cash deposit with the bank of over $30 million for its entire share of future construction and other Project costs due under the JP Morgan facility. The issue Toll is referring to on that project must relate to other members, as it does not relate to us."
Inspirada may be just the beginning. The same cast of characters, plus Pulte, Ryland and U.S. Home/Lennar, is involved in another JV in the Vegas metro area that is just as large as Inspirada. Called Kyle Canyon, this JV involved another auction of federal land to a consortium, this one also lead by Focus, involving 1,710 acres of raw land at the height-of-the-market in Feb. '05. The deal was secured with a $510-million bid, a whopping $298,245 an acre, nearly 10 times the price of land in the same area that was secured by Del Webb just five years earlier. At the time, Focus made news when it went to Wall Street for financing, and got the transaction itself rated.
The financial condition of Kimball Hill is thus critical to the balance sheets of the other JV partners. In Kimball Hill's case, the company specifically noted "two failing joint venture arrangements in Nevada" that contributed to a $17 million write-down for the fourth quarter of 2007. According to a filing with the SEC, Kimball Hill is carrying $60 million in debt related to the two JVs and is committed to take down another $59 million in land by this May.
According to the Kimball Hill filing, "There is a substantial likelihood that its liquidity will be insufficient to support these purchase obligations. Failure to make either purchase could, among other things, result in an event of default under the applicable joint venture's secured credit facility."
SACRAMENTO A sale that sets the market price for land at $.16 on the dollar in Sacramento came to light this week. In a JV, Pulte and Centex bought the Rancho Cordova property in 2004 for $50 million. Last month, they sold it to local land developers for a reported price of $8 million. The disparity is called "shocking" by a local source and begs the question: how did this happen? Was the price paid in 2004 that inflated? Or was the property grossly undervalued at sale? Or both?
NORTHERN LOS ANGELES--SANTA CLARITA VALLEY This week the Elephant In The Room Award goes to Lennar for somehow keeping the unraveling of the Landsource JV deal under wraps, despite the fact that many informed people in the industry are talking. There's no imbedded link here, because it hasn't hit the news, (with the company fiscal Q1 ending Feb 29, look for Lennar to be reporting in the next 2 weeks) but again, those appraisals are coming back to bite.
Lots of numbers are being floated around, but here's what's clear. Last year, when Lennar struck a deal to sell off interest in the JV, the original valuation of the property was reported at $2.6 billion for refinancing purposes. But Lennar's original investment of $1.3 billion is what's in danger. It appears that during recent appraisals, the value has declined. The chatter in the market among people who would be likely to know of such things, both Lennar and financial partner MW Housing (a combination of the CalPERS pension fund and Weyerhaeuser Real Estate) are being asked to put more money--$100 to $200 million--into the deal.
The two entities are said to be at a standoff over the cash infusion and market sources speculate there is a strong possibility the land may go back to the banks.